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The American Prospect - articles by authorenMcCain's Delusional Tax Planhttp://prospect.org/article/mccains-delusional-tax-plan
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>America's tax code needs a serious overhaul. The last clean-up was in 1986, when Ronald Reagan turned away from his tax-slashing past to partner with a Democratic Congress and close loopholes, change rates, and broaden the tax base. Over the intervening decades, lobbyists have left their Gucci footprints all over the code, and our system is a bigger mess than ever -- one that should give both Democrats and Republicans pause. </p>
<p>For instance, America taxes corporations at the second-highest rate in the industrialized world but collects the fourth-lowest amount of corporate tax revenue. Why? Loopholes, special deductions, tax credits, subsidies, and shelters. Politically influential industries get special deals, distorting investment decisions and forcing overall tax rates higher than they need to be. </p>
<p>John McCain once seemed eager to pick up the reform mantle. A tough-talking conservative who wraps himself in the Gipper's legacy, inveighs against earmarks, calls himself a deficit hawk, and fought George Bush's 2001 and 2003 tax cuts, McCain seemed to be one of the few politicians in America actually eager to restore some sense to the tax system. Then he decided to run for president. </p>
<p>Over the course of his campaign, McCain has consistently chosen granting tax breaks for industry and wealthy donors over tackling the problem of pet tax benefits. He proposes cutting the corporate tax rate from 35 percent to 25 percent, costing $100 billion a year, but fails to eliminate a single corporate tax break. A 25 percent rate would be below the average rate of other industrialized countries and the lowest among G-7 countries by a significant margin. </p>
<p>But McCain does not stop there. He would let companies immediately write off all investment in equipment and technology. Companies would get an immediate up-front deduction for their investments, rather than being forced to deduct their costs over time. The change is very valuable for companies because a $100 deduction today is worth a lot more than $10 a year for ten years. For the same reason, it is very expensive for the Treasury -- to the tune of about $75 billion a year. </p>
<p>McCain's top policy advisor Douglas Holtz-Eakin claims that such a write-off has no long-term cost. In fact, when Holtz-Eakin headed the Congressional Budget Office, it concluded that a similar, smaller proposal cost $440 billion over a decade. Reagan tax official Ron Pearlman labeled Holtz-Eakin's claim "so intellectually dishonest it's outrageous." </p>
<p>In addition to covering up the true cost of its corporate tax cuts, the McCain plan has another serious flaw: Companies can use new investments to shelter profits from other parts of their business from tax. Other advocates of immediate investment write-offs, such as George Bush's tax reform panel, considered it "essential" to also eliminate the deduction for business interest. But revisiting the interest deduction raises a host of thorny problems for Wall Street, and McCain has simply ignored this hole in his plan. </p>
<p>For individuals, McCain proposes repealing the Alternative Minimum Tax, the parallel tax system that was intended to prevent tax sheltering but now threatens millions of middle-class families with higher taxes and more complexity. Millions of taxpayers are required to calculate their taxes under two systems -- the regular tax code and the AMT -- and pay the higher sum. Because the AMT is not indexed for inflation, it threatens more middle-class families every year. </p>
<p>Congress has repeatedly passed temporary solutions that exempt most of the middle class from the AMT, but McCain would go further and repeal the AMT entirely. This approach would cost $60 billion more a year than the temporary patches do, and 57 percent of that money would flow to the top 1 percent of households. McCain could have solved both the cost and fairness problems by replacing the AMT with a modest surtax on the households benefiting from its repeal, but he did not. Once again, he chose all dessert and no vegetables. </p>
<p>McCain's final tax proposal is doubling the tax exclusion for dependents, costing $65 billion and helping most families with children. In essence, each family would be able to deduct an additional $3,500 for each child. This means that a millionaire, who is in the 35 percent tax bracket, would get $1,225 per child, while a steelworker, who is in the 15 percent tax bracket, would get $525. Families in poverty would get nothing because they pay no income taxes, even though they pay thousands in payroll and sales taxes. </p>
<p>Here, too, McCain had alternatives. Liberals have suggested consolidating tax benefits for children into a simpler, unified credit that is especially beneficial to working-class families who do not receive the earned income tax credit. Similarly, "Sam's Club conservatives" Ross Douthat and Reihan Salam have suggested baby bonuses to help new families with children. </p>
<p>If McCain had taken these alternatives, his tax plan would still be costly but it would have had more for families and less in corporate giveaways. He could have railed with equal passion for tax cuts and for tax reform; for toughness on corporate special interests and fairness and growth for ordinary businesses and families. </p>
<p>To pay for his $300 billion a year in tax cuts, McCain has made only two significant proposals. He would freeze discretionary spending besides that on defense and veterans, saving about $15 billion but hurting good programs and bad, and he would eliminate earmarks, saving as much as $18 billion a year. </p>
<p>McCain initially claimed that eliminating earmarks would save $100 billion, but abandoned that claim after <a href="http://thinkprogress.org/2008/04/17/military-family-housing-earmark/">Scott Lilly pointed out</a> that his figure included the entire Israel aid budget as well as military housing. Even the $18 billion figure is inflated since McCain now admits that some of these earmarks have value, like the ferry in the depressed Delta community he visited last week. </p>
<p>To pay for the rest of his tax cuts -- some $270 billion, nearly 90 percent of the total -- McCain turns to obfuscation. He promises to review a White House list of wasteful spending and a Treasury Department list of corporate tax loopholes and create a blue-ribbon commission that will, presumably, draw up another list that will need further review. But so far he has not endorsed actually cutting any programs on these lists. </p>
<p>Depending on your perspective, McCain's agenda is either empty or terrifying. It is empty in the sense that McCain offers an array of budget-cutting gimmicks that dwarf Reagan's <a href="http://query.nytimes.com/gst/fullpage.html?res=9A0DE6DA173BF932A25756C0A960948260&amp;sec=&amp;spon=&amp;pagewanted=all">magic asterisk</a>. But McCain's tax cuts are terrifying because, as Jared Bernstein has argued <a href="http://www.prospect.org/cs/articles?article=what_is_mccains_economic_agenda">in these pages</a>, they would eventually trigger a budgetary crisis that transforms deep spending cuts from unthinkable to inevitable. </p>
<p>It's hard to know if McCain is intentionally pursuing a dramatic downsizing in the government role, but it's clear to his supporters. Conservative activist Grover Norquist -- who once feuded with McCain but now praises his tax agenda -- has been clear about his desire to shrink government "down to the size where we can drown it in a bathtub." Marxists used to say "the worse the better," aiming to "heighten the contradictions of capitalism." This is the Norquist approach to our budget these days, and the implicit logic in McCain's as well. </p>
<p>McCain's strength as a candidate is rooted in his claim that he is a man who talks honestly and stands up to special interests. But now, on the central issue of this election, he has an agenda that does neither. With corporate giveaways and phony freezes and scrubs, McCain's tax agenda undermines his core political appeal. </p>
</div></div></div>Fri, 02 May 2008 07:08:13 +0000147182 at http://prospect.orgRobert GordonDid Liberals Cause the Sub-Prime Crisis?http://prospect.org/article/did-liberals-cause-sub-prime-crisis
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>The idea started on the outer precincts of the right. Thomas DiLorenzo, an economist who calls Ron Paul "the Jefferson of our time," wrote in September that the housing crisis is "the direct result of thirty years of government policy that has forced banks to make bad loans to un-creditworthy borrowers." The policy DiLorenzo decries is the 1977 Community Reinvestment Act, which requires banks to lend throughout the communities they serve. </p>
<p>The Blame-CRA theme bounced around the right-wing Freerepublic.com. In January it figured in a <i>Washington Times</i> column. In February, a Cato Institute affiliate named Stan Liebowitz picked up the critique in a <i>New York Post</i> op-ed headlined "The Real Scandal: How the Feds Invented the Mortgage Mess." On <i>The National Review</i>'s blog, The Corner, John Derbyshire channeled Liebowitz: "The folk losing their homes? are victims not of 'predatory lenders,' but of government-sponsored -- in fact government-<i>mandated</i> -- political correctness." </p>
<p>Last week, a more careful expression of the idea hit <i>The Washington Post</i>, in an article on former Sen. Phil Gramm's influence over John McCain. While two progressive economists were quoted criticizing Gramm's insistent opposition to government regulation, the Brookings Institution's Robert Litan offered an opposing perspective. Litan suggested that the 1990s enhancement of CRA, which was achieved over Gramm's fierce opposition, may have contributed to the current crisis. "If the CRA had not been so aggressively pushed," Litan said, "it is conceivable things would not be quite as bad. People have to be honest about that." </p>
<p>This is classic rhetoric of conservative reaction. (For fans of welfare policy, it is Charles Murray meets the mortgage mess.) Most analysts see the sub-prime crisis as a market failure. Believing the bubble would never pop, lenders approved risky adjustable-rate mortgages, often without considering whether borrowers could afford them; families took on those loans; investors bought them in securitized form; and, all the while, regulators sat on their hands. </p>
<p>The revisionists say the problem wasn't too little regulation; but too much, via CRA. The law was enacted in response to both intentional redlining and structural barriers to credit for low-income communities. CRA applies only to banks and thrifts that are federally insured; it's conceived as a <i>quid pro quo</i> for that privilege, among others. This means the law doesn't apply to independent mortgage companies (or payday lenders, check-cashers, etc.) </p>
<p>The law imposes on the covered depositories an affirmative duty to lend throughout the areas from which they take deposits, including poor neighborhoods. The law has teeth because regulators' ratings of banks' CRA performance become public and inform important decisions, notably merger approvals. Studies by the Federal Reserve and Harvard's Joint Center for Housing Studies, among others, have shown that CRA increased lending and homeownership in poor communities without undermining banks' profitability. </p>
<p>But CRA has always had critics, and they now suggest that the law went too far in encouraging banks to lend in struggling communities. Rhetoric aside, the argument turns on a simple question: In the current mortgage meltdown, did lenders approve bad loans to comply with CRA, or to make money? </p>
<p>The evidence strongly suggests the latter. First, consider timing. CRA was enacted in 1977. The sub-prime lending at the heart of the current crisis exploded a full quarter century later. In the mid-1990s, new CRA regulations and a wave of mergers led to a flurry of CRA activity, but, as <a href="http://www.newamerica.net/publications/resources/2008/community_reinvestment_act">noted</a> by the New America Foundation's Ellen Seidman (and by Harvard's Joint Center), that activity "largely came to an end by 2001." In late 2004, the Bush administration announced plans to sharply weaken CRA regulations, pulling small and mid-sized banks out from under the law's toughest standards. Yet sub-prime lending continued, and even intensified -- at the very time when activity under CRA had slowed and the law had weakened. </p>
<p>Second, it is hard to blame CRA for the mortgage meltdown when CRA doesn't even apply to most of the loans that are behind it. As the University of Michigan's Michael Barr <a href="http://www.house.gov/apps/list/hearing/financialsvcs_dem/barr021308.pdf">points out</a>, half of sub-prime loans came from those mortgage companies beyond the reach of CRA. A further 25 to 30 percent came from bank subsidiaries and affiliates, which come under CRA to varying degrees but not as fully as banks themselves. (With affiliates, banks can choose whether to count the loans.) Perhaps one in four sub-prime loans were made by the institutions fully governed by CRA. </p>
<p>Most important, the lenders subject to CRA have engaged in less, not more, of the most dangerous lending. Janet Yellen, president of the San Francisco Federal Reserve, offers the killer statistic: Independent mortgage companies, which are not covered by CRA, made high-priced loans at more than <i>twice</i> the rate of the banks and thrifts. With this in mind, Yellen specifically <a href="http://www.frbsf.org/news/speeches/2008/0331.html">rejects</a> the "tendency to conflate the current problems in the sub-prime market with CRA-motivated lending.? CRA, Yellen says, "has increased the volume of responsible lending to low- and moderate-income households." </p>
<p>Yellen is hardly alone in concluding that the real problems came from the institutions beyond the reach of CRA. One of the only regulators who long ago saw the current crisis coming was the late Ned Gramlich, a former Fed governor. While Alan Greenspan was cheering the sub-prime boom, Gramlich warned of its risks and unsuccessfully pushed for greater supervision of bank affiliates. But Gramlich praised CRA, saying last year, "banks have made many low- and moderate-income mortgages to fulfill their CRA obligations, they have found default rates pleasantly low, and they generally charge low mortgages rates. Thirty years later, CRA has become very good business." </p>
<p>It's telling that, amid all the recent recriminations, even lenders have not fingered CRA. That's because CRA didn't bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA -- or <i>any</i> federal regulator. Law didn't make them lend. The profit motive did. </p>
<p>And that is not political correctness. It is correctness.</p>
</div></div></div>Mon, 07 Apr 2008 16:56:37 +0000147110 at http://prospect.orgRobert GordonWorkers, Stiffedhttp://prospect.org/article/workers-stiffed-0
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>
Progressive critics of the budget reconciliation bills now being melded together by a joint House-Senate conference committee usually attack the measures as tax breaks for the wealthy, paid for with budget cuts for the poor. That's true, as far as it goes. Many of the cuts now being considered -- reductions in Medicaid, Food Stamps, and child support enforcement, together with increases in interest rates on student loans -- wouldn't even finance one-seventh of the recent tax breaks for Americans making over $380,000.</p>
<p>But progressives might get more traction by arguing a slightly different point: that conservatives are pushing to eliminate incentives for the work of poor Americans as a way to reduce taxes on the accumulated wealth of the most fortunate. In tax policy, many progressives already complain -- and rightly so -- that President Bush is shifting the tax burden away from capital and onto labor. But the argument equally applies to cuts in programs that provide work incentives by offering the working poor benefits like health care and child care.</p>
<p>Conservative cuts in these benefits are a perverse tribute to changes that conservatives promoted a decade ago in the name of work. Before 1996, when conservatives paid for a tax cut by slashing welfare, they claimed to be doing poor people a favor by saving them from dependency. But with the 1996 welfare reform, conservatives claimed victory in the battle against aid to the “undeserving poor.” The new federal program, aptly named Temporary Assistance to Needy Families, suspended welfare payments after five years and mandated that able individuals receiving help be working, looking for work, or training for work at least 30 hours a week.</p>
<p>At the same time, thanks mostly to Bill Clinton, annual spending on supports for the working poor roughly doubled from 1992 to 1999. Because of the expansions in the Earned Income Tax Credit, child care subsidies, and health care programs, poor families who worked hard and played by the rules had a better shot at a decent life. Not that they were rich, but, according to estimates by economists Rebecca Blank and David Ellwood, an average working single mother with two children saw her disposable income rise by $2,500 above inflation in this period. The families were better off -- and America was too: Studies by economist John Karl Scholz and others have shown that these initiatives actually increased labor participation among low-income families.</p>
<p>It is precisely such work supports that congressional conservatives would now slice away. For example, some parents who have left the welfare rolls and taken jobs can now continue receiving Food Stamps while their income rises above the poverty line. In the real world, these folks still struggle to put food on the table: We are talking about a single mother working full-time for less than $9 an hour, then paying so much for child care that her disposable income falls below the poverty line. Working families like hers will lose Food Stamps altogether under the House budget.</p>
<p>It's the same story for health care. Today, Medicaid provides coverage for children in low-income families just above the poverty line. Their parents may work full-time and earn the minimum wage, but the House bill promises billions from new charges imposed on such families. A family making about $1300 per month could now pay nearly $70 of that income just for health care. The bill also cuts off guaranteed coverage for services children desperately need, like eyeglasses to see blackboards -- just because their parents are “too rich.”</p>
<p>Then there is child care. If we are serious about encouraging work for single parents, as we should be, then we must be equally serious about ensuring working parents can afford child care. Otherwise work won't be ennobling for families; it will just be lousy for their children. Yet according to the Center on Budget and Policy Priorities, the House bill would eliminate child-care assistance for 330,000 children by 2010.</p>
<p>Finally, consider child support enforcement. Here's a policy that lifts poor children out of poverty by requiring that their parents, usually fathers, do right by their kids, usually by going to work. Under the House bill, a staggering $24 billion in child support would go uncollected. </p>
<p>Conservatives like to present themselves as pro-growth, but these cuts make little economic sense. With demographers now projecting zero growth in our native workforce over the next 20 years, America will need to expand its labor force and ensure that those who can work do. Conservatives once emphasized how the welfare state could affect work incentives, for better or worse. Parents who lose health care, child care, and Food Stamps when they work “too much” are going to work less.</p>
<p>The grim truth is that encouraging work isn't conservatives' priority. Just as budget cuts are undermining incentives for labor, tax breaks are increasing incentives for passive investment. The 2003 tax cut reduced the top rate on capital gains by 25 percent and the top rate on dividends by nearly 60 percent. These tax breaks allow wealthy investors to pay a lower rate on their income than the people who drive their cars. Yet these are the tax breaks financed by reductions in work incentives.</p>
<p>Liberals are right to point out that conservative budget policies take from the poor and give to the rich. But what is more striking, and ultimately more saddening, is that they betray the deepest commitment conservatives claim to honor: hard work.</p>
<p><i>Robert Gordon is senior vice president for economic policy, and Josh Lynn is a research associate, at the Center for American Progress.</i></p>
</div></div></div>Fri, 09 Dec 2005 17:41:31 +0000145075 at http://prospect.orgRobert GordonFailing Gradehttp://prospect.org/article/failing-grade
<div class="field field-name-body field-type-text-with-summary field-label-hidden"><div class="field-items"><div class="field-item even"> <p>During the second presidential debate last year, George W. Bush ventured that “the No Child Left Behind Act is really a jobs act when you think about it.” Democrats mocked President Bush, but education has always been critical for a president who asks voters to “sense my heart.” It is the only major issue on which he reached across the political aisle -- all the way to Senator Ted Kennedy -- to forge a broad consensus for reform. That's why it's sad now to see Bush eviscerating that consensus and empowering reform's critics. Monday's budget is the latest bad sign. </p>
<p>Bush's approach to education marks a striking shift for Republicans. In the 1990s, when then-House speaker Newt Gingrich tried to abolish the Education Department, the GOP had looked hard-hearted. Much as President Bill Clinton moderated a party's soft image by promoting welfare reform, President Bush sweetened a party's tough tone with a Clintonian new deal on education: The federal government would offer record support for schools, but it would demand record returns through high standards, tough tests, and real remedies for schools that don't measure up.</p>
<p>In important ways, Bush's good politics made for good policy, too. The education reform law isn't perfect, but it codifies a national commitment extraordinary at any time but particularly from a Republican: Every child, regardless of race or poverty, will have the basic skills to participate in our economy and democracy. The law says that we will set high standards, and we will measure our success in meeting those standards. Liberals like Ted Kennedy stood with Bush for good reason.</p>
<p>During his first term, Bush honored at least some of the bargain. He didn't propose the funding authorized by the new law, but he did support sharp growth. Democrats like Senator John Kerry rightly complained that Bush wasn't living up to the deal -- but Bush had a ready response, as in that second debate: “Only a liberal senator from Massachusetts would say that a 49 percent increase in funding for education was not enough.”</p>
<p>The new budget abandons the pretense of funding education increases. Like Gingrich, Bush has now proposed to cut education in nominal dollars. His No Child Left Behind request now falls $12 billion short, fully one-third of the authorization level. Bush has flat-funded the charter schools that his own administration champions. He has flat-funded the afterschool and preschool programs that troubled kids need. And he has eliminated promising reforms like breaking up big, weak schools. At the very moment when reform's demands have climbed -- when more schools must allow students to transfer, offer tutoring, or prepare to shut down -- the gap between funding envisioned and funding offered for reform has widened into a chasm.</p>
<p>There is one clear loser here: education reform. It's always been a tough sell. Critics on the right have never liked Washington's interference with local schools. Critics on the left have never liked the law's unyielding demands or its treatment of testing as the measure of all things. More schools are now looking up a hill they see little prospect of climbing.</p>
<p>Reform's best hope has always been simple: It just has to work. But underfunding fuels critics' worst fears. To take only one example: When states don't have money, they buy lousy off-the-shelf tests. Overburdened teachers boost their students' scores by structuring lessons around the tests instead of teaching more worthwhile material. And then parents fume about “teaching to the test.” Much of this problem could be solved with better tests: tests that are connected to high standards; demand more sophisticated knowledge; and require longer answers and challenging essays -- not just penciling in bubbles. But better tests cost billions ($3 billion over five years, according to the Government Accountability Office) that fiscally strapped states don't have and that the president hasn't offered. This new budget means more parents will be angry about high standards when they should be angry about low funding.</p>
<p>The budget also undermines the political coalition for reform. Congressman Dick Gephardt captured many liberals' sentiments when he said he supported No Child Left Behind “because it was the only way to get money into public education under a Bush presidency.” As the promise of more money evaporates, so too does support. </p>
<p>The president's defenders will say that federal dollars make a small contribution to school budgets and that local reform can and should continue even without the new resources. They're right, but that's not the point. Bush's budget makes successful reform that much tougher. The Bush administration found the money to pay off Armstrong Williams. They found the money to pay for the jobs act they really care about: tax cuts for multimillionaires. They should have found the money to pay for their education bill. What gets funded, and what doesn't, says far too much about what's in the president's heart.</p>
<p><i>Robert Gordon is a senior fellow at the Center for American Progress and served as director of domestic policy for the Kerry-Edwards'04 campaign.</i></p>
</div></div></div>Mon, 14 Feb 2005 16:06:32 +0000144279 at http://prospect.orgRobert Gordon